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Fossil fuel support is rising again in a threat to climate change efforts

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Fossil-fuel subsidies are environmentally harmful, costly, and distortive. After a 3 years downward trend between 2013 and 2016, government support for fossil fuel production and use has risen again, in a threat to efforts to curb greenhouse gas emissions and air pollution, and the transition to cleaner and cheaper energy. Support across 76 countries increased by 5% to USD 340 billion in 2017, according to a new OECD-IEA report prepared for the G20.

OECD-IEA Update on Recent Progress in Reform of Inefficient Fossil Fuel Subsidies that Encourage Wasteful Consumption also shows that even in the group of 44 OECD and G20 countries, where fossil fuel support is still declining, the reduction has slowed down. Support in these countries was down 9% in 2017, a slower decline than the 12% recorded in 2016 and 19% in 2015.

The reversal comes as some countries reinstated stronger price controls on fossil fuels, in response to volatility in international oil prices, which made it harder to continue energy pricing and taxation reforms. 

Some progress has nonetheless been made: the report finds that many countries, including Argentina, India, Indonesia and several Middle Eastern and Northern African economies, have continued to take steps to reduce support for energy consumption. Western Europe has completed its phasing out of hard-coal subsidies and efforts continue to end state aid to coal-fired power generation in the European Union.

Oil and gas industries in several countries, however, continue to benefit from government incentives, mostly through tax provisions that provide preferential treatment for cost recovery. Such policies go against domestic efforts to reduce emissions.

The report was presented to G20 energy officials ahead of the G20 Ministerial Meeting on Energy Transitions and Global Environment in Karuizawa, Japan, where countries reiterated their commitment to phasing out inefficient fossil fuel subsidies and encouraged countries that have not done so to volunteer for a Peer Review.

“This new OECD-IEA report signals a worrying slowdown in our efforts to phase out fossil fuel subsidies,” said OECD Secretary-General Angel Gurría. “The critical nature of the climate change crisis has never been clearer than it is today. Countries should be accelerating their reforms, not taking their feet off the pedal. We cannot promote inclusive and sustainable growth if we continue subsidising fossil fuels!”

The report combines the IEA’s price-gap approach to capture the transfer to consumers of policies that keep fossil fuels below reference prices and the OECD’s 2019 Inventory of Support Measures for Fossil Fuels, which takes stock of spending programmes and tax breaks used in the 36 OECD countries and eight emerging countries (Argentina, Brazil, China, Colombia, India, Indonesia, Russia and South Africa) to encourage fossil fuel production or use. These include measures that reduce prices for consumers or that lower exploration and exploitation costs for oil and gas companies.

Increasing transparency on the use of scarce public resources can help to keep up momentum for fossil fuel subsidy reform. Building on the evidence brought to the table by the OECD, G20 countries committed in Pittsburgh in 2009 to “rationalise and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption.” Since then G20 countries – China, Germany, Indonesia, Italy, Mexico and the United States – have completed voluntary G20 Peer Reviews of inefficient fossil fuel subsidies, and Argentina and Canada are just starting theirs. The OECD has been asked to play Secretariat role for all the country reviews, to chair and facilitate these processes, which have to date evaluated more than 100 government interventions relating to the production and use of fossil fuels.

“OECD evidence leaves no doubt” says Gabriela Ramos, OECD Chief of Staff and G20 Sherpa – “inefficient fossil fuel subsidies undermine global efforts to tackle climate change, aggravate local pollution, and are a strain on public budgets, draining scarce fiscal resources that could be invested in education, skills, and physical infrastructure. We urge all G20 countries to keep up the effort, and join the voluntary G20 Peer Reviews of inefficient fossil fuel subsidies.”

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‘Industry 4.0’ tech for post-COVID world, is driving inequality

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Developing countries must embrace ground-breaking technologies that have been a critical tool in tackling the COVID-19 pandemic, or else face even greater inequalities than before, UN economic development  experts at UNCTAD said on Thursday.

“Very few countries create the technologies that drive this revolution – most of them are created in China and the US – but all countries will be affected by it”, said UNCTAD’s Shamika Sirimanne, head of Division on Technology and Logistics. “Almost none of the developing countries we studied is prepared for the consequences.”

The appeal, which is highlighted in a new UNCTAD report, relates to all things digital and connective, so-called “Industry 4.0” or “frontier technologies”, that include artificial intelligence, big data, blockchain, 5G, 3D printing, robotics, drones, nanotechnology and solar energy.

Gene editing, another fast-evolving sector, has demonstrated its worth in the last year, with the accelerated development of new coronavirus vaccines.

Drone aid

In developing countries, digital tools can be used to monitor ground water contamination, deliver medical supplies to remote communities via drones, or track diseases using big data, said UNCTAD’s Sirimanne.

But “most of these examples remain at pilot level, without ever being scaled-up to reach those most in need: the poor. To be successful, technology deployment must fulfil the five As: availability, affordability, awareness, accessibility, and the ability for effective use.”

Income gap widening

With an estimated market value of $350 billion today, the array of emerging digital solutions for life after COVID is likely to be worth over $3 trillion by 2025 – hence the need for developing countries to invest in training and infrastructure to be part of it, Sirimanne maintained.

“Most Industry 4.0 technologies that are being deployed in developed countries save labour in routine tasks affecting mid-level skill jobs. They reward digital skills and capital”, she said, pointing to the significant increase in the market value of the world’s leading digital platforms during the pandemic.

Innovation dividends

“The largest gains have been made by Amazon, Apple and Tencent,” Sirimanne continued. “This is not surprising given that a very small number of very large firms provided most of the digital solutions that we have used to cope with various lockdowns and travel restrictions.”

Expressing optimism about the potential for developing countries to be carried along with the new wave of digitalisation rather than be swamped by it, the UNCTAD economist downplayed concerns that increasing workforce automation risked putting people in poorer countries out of a job.

This is because “not all tasks in a job are automated, and, most importantly, that new products, tasks, professions, and economic activities are created throughout the economy”, Sirimanne said.

‘Job polarization’

“The low wages …for skills in developing countries plus the demographic trends will not create economic incentives to replace labour in manufacturing – not yet.”

According to UNCTAD, over the past two decades, the expansion in high and low-wage jobs – a phenomenon known as “job polarization” – has led to only a single-digit reduction in medium-skilled jobs in developed and developing countries (of four and six per cent respectively).

“So, it is expected that low and lower-middle income developing countries will be less exposed to potential negative effects of AI and robots on job polarization”, Sirimanne explained.

Nonetheless, the UN trade and development body cautioned that there appeared to be little sign of galloping inequality slowing down in the new digital age, pointing to data indicating that the income gap between developed and developing countries is $40,749 in real terms today, up from $17,000 in 1970.

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Greater Innovation Critical to Driving Sustained Economic Recovery in East Asia

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Innovation is critical to productivity growth and economic progress in developing East Asia in a rapidly changing world, according to a new World Bank report launched today.

Countries in developing East Asia have an impressive record of sustained growth and poverty reduction.  But slowing productivity growth, uncertainties in global trade, and technological advances are increasing the need to transition to new and better modes of production to sustain economic performance.

To support policy makers in meeting this challenge, The Innovation Imperative for Developing East Asia examines the state of innovation in the region, analyzes the key constraints firms face in innovating, and lays out an agenda for action to spur innovation-led growth.

A large body of evidence links innovation to higher productivity,” said Victoria Kwakwa, World Bank Vice President for East Asia and Pacific. “The COVID-19 pandemic, climate change, along with the fast-evolving global environment, have raised urgency for governments in the region to promote greater innovation through better policies.

While developing East Asia is home to several high-profile innovators, data presented in the report show that most countries in the region (except China) innovate less than would be expected given their per capita income levels. Most firms operate far from the technological frontier. And the region is falling behind the advanced economies in the breadth and intensity of new technology use.

“Aside from some noteworthy examples, the vast majority of firms in developing East Asia are currently not innovating,” said Xavier Cirera, a lead author of the report. “A broad-based model of innovation is thus needed – that supports a large mass of firms in adopting new technologies, while also enabling more-sophisticated firms to undertake projects at the cutting edge.”

The report identifies several factors that impede innovation in the region, including inadequate information on new technologies, uncertainty about returns to innovation projects, weak firm capabilities, insufficient staff skills, and limited financing options. Moreover, countries’ innovation policies and institutions are often not aligned with firms’ capabilities and needs.

To spur innovation, the report argues that countries need to reorient policy to promote diffusion of existing technologies, not just invention; support innovation in the services sectors, not just manufacturing; and strengthen firms’ innovation capabilities. Taking this broader view of innovation policy will be critical to enabling productivity gains among a broader swath of firms in the region.

“It is important for governments in the region to support innovation in services, given their rising importance in these economies – not only for better service quality but increasingly as key inputs for manufacturing,” said Andrew Mason, also a lead author of the report.

Countries also need to strengthen key complementary factors for innovation, including workers’ skills and instruments to finance innovation projects. Building stronger links between national research institutions and firms will also be critical to fostering innovation-led growth in the region.

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Sea transport is primary route for counterfeiters

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More than half of the total value of counterfeit goods seized around the world are shipped by sea, according to a new OECD-EUIPO report.

Misuse of Containerized Maritime Shipping In the Global Trade of Counterfeits says that seaborne transport accounts for more than 80% of the volume of merchandise traded between countries, and more than 70% of the total value of trade.

Containerships carried 56% of the total value of seized counterfeits in 2016. The People’s Republic of China was the largest provenance economy for container shipments, making up 79% of the total value of maritime containers containing fakes and seized worldwide. India, Malaysia, Mexico, Singapore, Thailand, Turkey and the United Arab Emirates are also among the top provenance economies for counterfeit and pirated goods traded worldwide.

Between 2014 and 2016, 82% of the seized value of counterfeit perfumes and cosmetics by customs authorities worldwide, 81% of the value of fake footwear and 73% of the value of customs seizures of fake foodstuff and toys and games concerned sea shipments. Additional analysis showed that over half of containers transported in 2016 by ships from economies known to be major sources of counterfeits entered the European Union through Germany, the Netherlands and the United Kingdom. There are also some EU countries, such as Bulgaria, Croatia, Greece and Romania, with relatively low volumes of containers trade in general, but with a high level of imports from counterfeiting-intense economies.

To combat illicit trade, a number of risk-assessment and targeting methods have been adapted for containerised shipping, in particular to enforce against illicit trade in narcotics and hazardous and prohibited goods. But the analysis reveals that the illicit trade in counterfeits has not been a high priority for enforcement, as shipments of counterfeits are commonly perceived as “commercial trade infractions” rather than criminal activity. Consequently, existing enforcement efforts may not be adequately tailored to respond to this risk, according to the report.  Tailored and flexible governance solutions are required to strengthen risk-assessment and targeting methods against counterfeits.

As well as infringing trademarks and copyright, counterfeit and pirated goods entail health and safety risks, product malfunctions and loss of income for companies and governments. Earlier OECD-EUIPO work has shown that imports of counterfeit and pirated goods amounted to up to USD 509 billion in 2016, or around 3.3% of global trade.

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